CBEH Gets a Much Needed Liquidity Boost

From the prospectus:

China Integrated Energy is a non-state-owned integrated energy company in China, which is engaged in three business segments, the wholesale distribution of finished oil and heavy oil products, the production and sale of biodiesel and the operation of retail gas stations.

Fundamentally, China Integrated Energy Inc (CBEH) is among my favorite stocks. The Company stands to benefit most certainly from increased Chinese consumer demand for gasoline, as automobile sales in China surpassed the United States earlier this year and have increased YOY each month of 2009. CBEH does own and operate 7 retail gas stations in the Shaanxi province, however the majority of revenues come from the wholesale end of the business.

With at least some of the current industrial activity in China fueled by unsustainable government spending, CBEH faces long term risks, particularly that diminished energy demand can't support recently expanded facilities. A less concrete concern may be the existence of PRC controlled oil and gas giants like PetroChina (PTR) (and their ability to undercut, etc.), however one could suppose a takeover to result in a profitable buyout. Otherwise, the stock looks unmatched based on valuation and growth.

Guidance for FY09 is $265M+ in revenue and $35M+ in net profit, up 87%+ from FY08. The Company has achieved profitability and growth, top to bottom, every year since FY06.

CBEH has been on my radar since it was CBEH.OB. When I first bought shares in June, only one other sale of the stock was made that day. Even since being listed on the NASDAQ this summer, there have been several days the stock has traded less than a dozen times. Today has not been one of those days.

This morining, the Company announced that a public offering of 5 million shares is being priced at $5.75/share, an 8% discount from yesterday's close. CBEH traded over $7.50/share for most of early October, then the 5 million share offering was announced and selling ensued. I sold my shares about 6 weeks ago at around $7, due to fear of market weakness (since then the market has gone up and CBEH has not, but I'll gladly take lucky instead of good).

So how attractive is CBEH now that shareholders have been diluted almost 20%? Simply, more so than ever.

With 33M shares now outstanding and earnings over $35M, CBEH trades at a P/E near 5.5 with annual revenue and earnings growth of 22%+ and 87%+, respectively. FY09 was no aberration, with earnings for fiscal years 2006-2008 as follows: $5.3M, $8.6M, $18.7M. Best of all, over a million shares have been sold to the public today, with two hours of trading to go. It seems the days of one or two sales and bid/ask spreads of 20% are finally done for CBEH. Now all that's left is attaining a double digit P/E.

Disclosure: No current positions

Comments

[Alphameister:]

One of the hazards I've discovered in owning Chinese growth stocks is the recurrent willingness of their corporate managments to sell stock well below the prevailing market price. While I hate the resultant dilution, I eventually come around to being grateful that they can obtain, during these difficult times, the financing needed to sustain their impressive growth.

Whether intended or not, I would suggest a double meaning to the term "liquidity" in your title. Not only is the balance sheet more liquid, but so is the trading market for the ADR which expands its appeal to include substantial investors who typically avoid stocks traded on the "bulletin board."

I like CBEH and will probably initiate a position this week. Thanks for the analysis.

Nov 01 02:50 PM

[Danny Furman:]

Well said, Alphameister. Ideally, the Company will use newly raised $$$ to buy another gas station or two, in addition to adding to storage/refining facilities. This offering is likely being taken advantage of by several funds, as previously only about 10% of outstanding shares were in public hands (data.cnbc.com/quotes/C...) and buying 10K+ shares likely meant buying at 5+ substantially different prices.
Ultimately, it is the latter definition you gave for "liquidity" that makes the stock appealing, and once the 5M shares are sold CBEH should perform extremely well.

Nov 02 08:56 AM

[User 493706:]

took a strong and long position in CBEH

Nov 04 12:00 AM